While the Department of Labor’s environmental, social, and governance rule garnered a lot of attention in 2022, there are two other developments simmering that could have significant implications for ERISA plans and financial services providers to ERISA plans as we move into 2023. These are proposed changes to (1) the rules on how to obtain a prohibited transaction exemption from the Department of Labor (DOL) and (2) the rules for qualified professional asset managers (QPAMs).
As background, ERISA contains very broad anti-conflict of interest rules in the form of “prohibited transactions.” The prohibited transaction rules are so broad that the drafters of ERISA recognized there needed to be certain exemptions from them in order for ERISA plans to function effectively. Some exemptions are in ERISA itself. However, other exemptions can be granted by the DOL—either to an entire “class” of parties or to an individual party.
Proposed Changes to the Prohibited Transaction Exemption Process
In March 2022, the DOL issued a proposed regulation that would change the procedures for how to apply for a prohibited transaction exemption from the DOL. Until the last 10 years or so, obtaining prohibited transaction exemptions was not uncommon, with the DOL issuing dozens per year (and going back even further in ERISA’s history, issuing over 100 in some years). In recent years, however, that number has fallen to single digits, reflecting a 97% decline in the last 20 years.
The March 2022 proposal will likely make prohibited transaction exemptions harder to obtain, making it unlikely that this trendline will change if the new rule is adopted. Among the proposed changes is to impose higher standards for independence for plan service providers involved in the prohibited transaction exemption request. This may make it difficult to identify appropriate independent service providers, especially in light of increasing consolidation in the financial services industry.
The proposed changes would also, among other things:
- effectively eliminate the opportunity to consult with the DOL on a “no-names” basis regarding whether it would be amenable to granting an exemption based on specified facts;
- significantly increase the information required to be submitted in support of an application;
- permit the DOL to reject an application request without first issuing a tentative denial or allowing the applicant an opportunity for a conference; and
- provide that a previously granted exemption does not bind the DOL in dealing with a new exemption request, even if the facts are substantially similar. (It is not clear how this would impact the DOL’s current EXPRO program, which allows for a streamlined review of an application that is substantially similar to at least two prior granted exemptions.)
Proposed Changes to the QPAM Exemption
In the world of institutional investment management, the so-called QPAM Exemption (Prohibited Transaction Class Exemption 1984-14) has evolved into something like a “gold standard” of managing ERISA plan assets. While the scope, nature, and uses of the QPAM Exemption can sometimes be misunderstood, the QPAM Exemption can provide broad exemptive relief to asset managers and is heavily relied upon by both plan fiduciaries who appoint asset managers and the asset managers themselves. In July 2022, the DOL issued a proposed rule that would extensively overhaul the QPAM exemption. We wrote an in-depth analysis of the proposal this summer.
The original rationale for the proposed changes was to address issues presented when an asset manager’s non-US affiliates are convicted of a crime or experience or other adverse events that might then affect the US entity from continuing to manage ERISA plan assets as a QPAM. The proposal, however, covers far more than that, as described in detail in our report.
The DOL solicited comments from affected parties and held hearings on the proposal in November. Suffice to say, there was not a lot of love shown for the proposed changes and there was an overall sense that the proposal was a solution in search of a problem. It remains to be seen how those reactions influence the DOL.
So as 2023 gets underway, we will eagerly await developments on these two fronts. Stay tuned for further BeneBits posts, LawFlashes, and webinars as these developments emerge.